The Competition and Markets Authority (CMA) last week slapped JD Sports and its largest shareholder with a £300,000 fine for allegedly breaking an order from the watchdog over its acquisition of Footasylum.
That merger was blocked in May – with JD ordered to sell the business – after the CMA ruled the combination would reduce competition in the UK sports retail market, both online and in-store.
The decision may represent a new way for the watchdog to evaluate mergers in British retail – and, if that is indeed the case, securing regulatory approval will from now on become much more complicated.
Looking closely at the CMA’s decision, some clues point to where the biggest challenges might lie and what might be in store for retailers keen to consider a merger in the future.
Size doesn’t matter
The CMA focused on how closely JD, Footasylum and their rivals competed with one another and de- emphasised the importance of their market share and degree of geographic overlap.
The decision examined each competitor in isolation and appeared to attach less weight to the combined strength of all the competitors together.
Ultimately, the CMA determined that none of their rivals competes as closely with JD and Footasylum as they do with one another.
Past retail merger decisions have also looked at closeness of competition, but they placed more weight on the overall size of the competitors and the target rm, conducting weighted market share analysis at the local level or taking into account national market shares.
This change in approach damaged JD’s chances given that Footsasylum was relatively small and some of JD’s competitors, such as Sports Direct, were much larger. The size of the competitors and the target firm may be less important in retail merger evaluations in the future.
The CMA focused on the impact of the merger on competition at a national level and, unlike previous decisions, did not conduct a detailed analysis of local markets.
This is not the first such case – national markets were cited in the Sainsbury’s-Asda decision – but it was the first to lack any detailed examination of local markets.
A contributory factor to the national focus in JD-Footasylum was that the CMA classified online and in-store within the same market. This change in precedent may make local area analysis less important in future retail deals.
CMA’s changing approach
Size is now less important. Deals where a larger retailer buys a smaller competitor may be subject to more in-depth investigations by the CMA.
Retailers considering a merger may need to assess whether the CMA would be interested in the deal, even if competition concerns appear minimal on the face of it.
A narrower view of the competitor set may mean that the CMA is more likely to identify concerns in its merger assessments going forward.
The risk is higher where retailers consistently monitor one another and where the CMA considers that the merging parties compete more closely with each other than they do with their competitors.
It’s no longer safe to assume that acquisitions where the target firm has a small market share are likely to receive clearance. The previous precedent is now less useful, so retailers should factor this into their pre-deal risk assessments.
Traditional remedies may not be available. A national focus on retail mergers means that the sale of local stores in areas with limited competition will probably not address the CMA’s concerns.
This will increase the risk for retailers planning mergers, particularly completed deals, as it could result in a forced sale à la JD-Footasylum.
If the CMA identifies concerns, or it looks likely that they will, retailers should discuss potential solutions with the CMA as early as possible.
Retailers can still successfully navigate mergers, though they are now more challenging and risky than they were previously. Retailers considering acquisitions should:
- Get strategic advice early in the process. It is often more challenging to influence the CMA’s thinking later in the merger review, so putting your best foot forward from the outset is advised.
- Identify helpful and unhelpful internal documents and proactively explain the context of these documents to the CMA in advance.
- If it looks likely the merger may raise concerns, engage with the CMA on potential solutions as early as possible.